I was representing the buyers at a recent real estate closing. I was going over the seemingly endless list of charges on the closing statement when their eyes started roll around like they might on one of those spinning carnival rides. But, when we got to the real estate tax credit, their smiles indicated that they were happy about a credit in their favor of nearly $3,000.00! This is not unusual for first time home buyers. At first they think – perhaps hope is a better word – they are getting a windfall. Maybe you’ve experienced this, too. It then becomes my duty to burst their bubble and explain what that credit actually means. If you’ve never bought a home, or haven’t bought or sold one recently you may not be familiar with real estate tax prorations which is how we calculate the real estate tax credit.
We all know about real estate taxes. It is the subject on the evening news and frequent newspaper articles. The amount of our tax bills causes cold sweats all over the Land of Lincoln. You may have even attempted to become familiar with how they are determined only to be confused and frustrated by the terms and their definitions. In the context of a real estate closing, real estate taxes are confusing too. You see, in Illinois we pay real estate taxes in arrears. What that means is the taxes on your house for 2012 are paid the following year in 2013, in two installments. In Cook County, the first installment is usually due around the beginning of March, and the second installment is due in midsummer or early fall, it’s varied over the years. The first installment is an estimate and is equal to 55% of the prior year’s taxes. You won’t know the actual amount of the full year’s taxes until the second installment is issued. In all other counties, the taxes are paid in two equal amounts in May and September.
When you sell your home, the boilerplate language of every real estate contract requires the seller to pay the real estate taxes up to the date of the closing. So, if you were to close on the sale of your home at the end of this month, you would have to pay the real estate taxes through August 31, 2103. Since the taxes for 2013 will not be determined until next year, we don’t know what the tax amount will be. Further, even if we did, the county would not accept the payment. Rather, we estimate what the sellers’ obligation will be, and we give that amount to the buyers as a credit. Then, when the 2013 bill comes due in 2014, the buyer will pay the bill. Still awake?
You’re next wondering how you fairly estimate what the tax bill will be. Here, we keep it simple (please infer sarcasm). We take the last full tax bill we know of, referred to as the “last ascertainable tax bill,” and adjust it up. We adjust it up because real estate taxes usually go up from year to year. How much we adjust the prior year taxes is negotiable and depends on a few factors. An experienced real estate attorney will be able to advise you. These days, we take last year’s bill and increase it by five to ten percent. If you are selling your home and agreed to a five percent adjustment then real estate taxes will be prorated based on 105% of the most recent ascertainable tax bill. This is the real estate tax proration. In special cases, such as short sales, there might be no adjustment in which case the proration is simply 100%.
Tax prorations are not exact and are not recalculated later when the actual bill is issued. So, when you sold your home and agreed to adjust the last bill by five percent, but the taxes only went up by three percent, you don’t get back that difference. On the other hand, if the taxes increased by eight percent, you don’t have to pay any more.
At my recent closing, I had to explain to my clients what while they got that nearly $3,000 credit, they will have to pay the full amount of the 2013 tax bill when it is issued in 2014. They understood, and while their joy was tempered a bit, they explained that they were just happy to see one number on the closing statement going in their favor.
If you have any questions about real estate tax prorations and credits, or any other real estate questions, don’t hesitate to send me an email. I enjoy responding to emails. It keeps me from getting aggravated during Cub games.
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